Just two short days ago, Goldman Sachs' significant oil downgrade targeting $40/bbl for most of 1H15 shocked the market [9]. This morning, Jeff Currie - the author of the report - appeared on Bloomberg TV [10] to explain his call for a "new oil order" that has been "fundamentally changed by Shale." Most telling though, Currie warns Tom Keene, crude oil may fall below bank’s six-month forecast of $39 a barrel and future rallies could be thwarted by the speed at which any lost shale output can recover... "you can always undershoot to the downside."
As Bloomberg notes, [10]
Goldman Sachs said U.S. crude oil may fall below bank’s six-month forecast of $39 a barrel and future rallies could be thwarted by the speed at which any lost shale output can recover.
“You can always undershoot to the downside,” Jeff Currie, Goldman’s head of commodities research, said in an interview on Bloomberg Television’s “Surveillance.” The forecast of lower prices was based in part on the bank’s estimates for default rates among the most-indebted U.S. producers, he said.
Goldman Sachs cut oil projections in a report on Jan. 11, estimating that West Texas Intermediate, the U.S. benchmark, will trade at $39 a barrel in six months’ time, as OPEC’s unwillingness to tackle a global surplus leaves prices seeking a new equilibrium. [9] WTI settled at $45.89 a barrel yesterday, its lowest since March 2009.
The speed at which investment can return to shale output is hurting prospects for a price recovery, Currie said today.
“Shale has fundamentally changed this market,” he said. “The lead time between when you put money in the ground and when you get production has collapsed from three-to-four years, all the way down to 30 days.”
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The Goldman report punchline:
Once a 2H15 US supply growth slowdown is more certain and given the very high decline rates on US production, renewed Libyan disruptions and an already visible demand response in the US, we expect the market to rebalance with inventories drawing rapidly from 3Q15 onwards. To accommodate the substantial expected first half inventory build and using the storage arbitrage to the one-year ahead swap, we are revising down our 3-, 6- and 12-month price forecasts for Brent to $42/bbl, $43/bbl and $70/bbl, respectively, from $80/bbl, $85/bbl and $90/bbl, and for WTI to $41/bbl, $39/bbl and $65/bbl from $70/bbl, $75/bbl and $80/bbl. The later expected trough in WTI prices is due to excess US storage capacity.
And visually:
[11]
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Simply put - as Currie explains in the clip above - $39/bbl is the level at which the bottomquartile of US shale producers are bankrupt...
